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Fri, 30 Nov 2018 17:49:16 +0000en-UShourly1https://wordpress.org/?v=5.0.1139843145ICOs – New Way Of Startup Fundraisinghttps://lexfuturus.io/2018/11/30/icos-new-way-of-startup-fundraising/
https://lexfuturus.io/2018/11/30/icos-new-way-of-startup-fundraising/#respondFri, 30 Nov 2018 17:33:04 +0000https://lexfuturus.io/?p=835In 2013, the Ethereum network brought initial coin offerings (ICOs) into the limelight. ICOs are a relatively new method to collect funds for new startups by using digital coins. According to CoinTelegraph, when Ethereum held its ICO, in just about 12 hours, 7.4 million ETH were pre-sold, and Vitalik Buterin, Ethereum’s founder, ended up raising […]

In 2013, the Ethereum network brought initial coin offerings (ICOs) into the limelight. ICOs are a relatively new method to collect funds for new startups by using digital coins.

According to CoinTelegraph, when Ethereum held its ICO, in just about 12 hours, 7.4 million ETH were pre-sold, and Vitalik Buterin, Ethereum’s founder, ended up raising more than $15 million to start the project. This was not the world’s first ICO, but it was the one that sparked the ICO revolution.

Why Initial Coin Offerings Roundups For Startup Fundraising?

In an initial public offering (IPO), a startup has to list its shares on public exchanges, and funds collected from the sale of shares provide the company with the funding. With an ICO, however, the company gives investors not shares, but crypto tokens that can be later used or traded.

IPO has geographical boundaries, while anyone across the globe can leverage ICOs. Moreover, unlike companies gathering funds through IPOs, successful ICOs focus on building communities and also allow extensive two-way communication between the company and investors.

Initial Coin Offerings In 2018

Since the start of 2018, we have seen some outstanding ICO roundups. ICO funding in 2018 Q1 surpassed the total 2017s ICO funding that was approximately $4 billion. In Q1 2018, the funding reached the $6.3 billion mark, which was 118% higher than that of 2017.

The largest ICO funding went to EOS, a blockchain platform that raised $4.1 billion in June, and Telegram with $850 million in March.

Moreover, a June 2018 PwC report says that ICOs will continue to pass the traditional venture capital funding, especially when it comes to the blockchain and technology-related startups.

To learn more on why initial coin offerings are a revolutionary way to get funded, check out the infographic below. It will take you through the history of ICOs, markets, trends, market news, legal battles of ICO, top ICOs, and everything that you need to know about the subject.

]]>https://lexfuturus.io/2018/11/30/icos-new-way-of-startup-fundraising/feed/0835Security Token Offerings – A brief introduction to STOshttps://lexfuturus.io/2018/11/25/security-token-offerings-brief-introduction/
https://lexfuturus.io/2018/11/25/security-token-offerings-brief-introduction/#respondSun, 25 Nov 2018 09:27:51 +0000https://lexfuturus.io/?p=820When ICOs first became popular, nearly every ICO said that its token was not a security. The pundits called 2017, the year of the utility token. But this year, security token offerings (STOs) became popular. Emerging regulatory frameworks have paved the way for the sale of security tokens. Background – The DAO and the SEC’s […]

]]>Posh paintings, and other assets, can be tokenized and sold as security tokens. Credit: James Kemp on Unsplash

When ICOs first became popular, nearly every ICO said that its token was not a security. The pundits called 2017, the year of the utility token. But this year, security token offerings (STOs) became popular. Emerging regulatory frameworks have paved the way for the sale of security tokens.

Background – The DAO and the SEC’s response

ICOs were the breakout phenomenon of 2017. They raised millions of dollars, with nothing more than a white paper. But many tried to avoid describing their tokens as securities. Instead, they called them “utility tokens”. Tokens which would be used on a future platform, performing some functions.

Here’s why.

In 2016, The DAO hacking incident happened. The DAO was going to be a decentralized autonomous organization. It would be powered by smart contracts. Everything would happen automatically in the organization. Token holders would use their tokens to vote on what the organization (i.e. the DAO) would do. And its profits would be shared with the token holders.

By July 2017, the SEC (Securities Exchange Commission of the US) responded. The SEC said, tokens in The DAO incident were a security. A security which would be under its jurisdiction. It implied that it could have been an offence to sell those DAO tokens without a licence from the SEC.

To the SEC, the DAO failed the Howey Test. Because DAO token holders would invest money, and receive profits from the efforts of others, it was a security.

It was the first time that the US federal regulator had weighed in on the conversation around token sales.

But the attraction of ICOs were undeniable. Startups thought that they had found a way to raise funds without giving up equity. Sell tokens, for use on a future platform, and use funds from the token sale to develop the platform. It was like a crypto version of Kickstarter.

But the SEC weighed heavy on everybody’s minds. So, it became a thing for ICO projects to declare that they were selling a utility token. Not a security token. “Move along now,” they said. “Nothing here but utility tokens.”

Now, all that looks set to change. STOs may become the preferred way to sell tokens in the future.

A shift in the regulatory framework for STOs

With STOs, the terms of the sale would say, “This token is not worthless. It’s backed by something. Gold. Or shares. Or land. Or other stuff like that.”

A security token could represent so many things. It could be a share. Or a piece of real estate. Or really expensive paintings.

With Bitcoin, people spoke about coloured coins. But coloured coins had one limitation: One coloured coin for one asset.

Security token offerings could mean turning a single asset into hundreds of tokens. And so an asset could be held by hundreds of people.

If the asset was liquidated, the token holders would be entitled to a share of the profits.

The more people discussed it, the more attractive it seemed.

And slowly but surely, the conversation happened. “Why can’t we have a security token offering?” asked some people.

“Because the SEC said so,” said some lawyers. They were still hung up on the SEC’s statement.

“Maybe you can, if it’s done correctly,” said some other lawyers. They thought to themselves that there must be a way. Some of them came up with pretty clever ideas.

“We can build the platform for you to run STOs,” shouted some tech developers. And they started building. (They made sure to first confer with their lawyers, of course.)

And then, the regulators became interested. This was an opportunity to regulate STOs. This could make their country (not the USA) a key destination for blockchain projects.

So, bit by bit, regulators began to implement rules. Rules that would define the boundaries between utility tokens and security tokens. The gears were shifting.

For example, Singapore’s Monetary Authority came out with its digital token offering guidelines. It identified a few scenarios on when a token may be a security. If it is, a license under the SFA (Securities and Futures Act) may be required for to sell the token (e.g. case study 2), or to manage the funds raised (e.g. case study 4).

If a person were interested in running an STO in Singapore (for example), he would need to comply with the licensing requirements of the regulator.

Where to do it?

In fact, the world is now open for business. Singapore may be one of the top destination for crypto projects, but it isn’t the only option for STOs.

The EtherDelta founder, Zachary Coburn, probably doesn’t know the answer. Still, he paid a fine of $388,000 to the SEC.

If you’re planning to run an STO, it makes sense to seek advice about compliance.

Whether you run your STO in Singapore, Malta, or elsewhere, it doesn’t matter. We are now in the age of globalization.

What matters is that you comply with the securities laws set by the regulators.

Disclaimer

This article was prepared for informational purposes only. No part of it should be construed as legal advice. If you need advice about running a security token offering, please consult with your lawyer.

]]>https://lexfuturus.io/2018/11/25/security-token-offerings-brief-introduction/feed/0820Legally binding or not? A discussion on ICO white papershttps://lexfuturus.io/2018/11/03/legally-binding-or-not-ico-white-papers/
https://lexfuturus.io/2018/11/03/legally-binding-or-not-ico-white-papers/#commentsSat, 03 Nov 2018 17:47:41 +0000https://lexfuturus.io/?p=784Introduction – The Restaurant Menu Imagine if you brought a friend for a lunch meeting. You both enter a restaurant and sit in a corner. Scanning the menu, you select your dishes, and inform the waiter. As the waiter leaves, you notice the fine print. “Photographs are for illustration purposes only.” So the question might […]

Imagine if you brought a friend for a lunch meeting. You both enter a restaurant and sit in a corner. Scanning the menu, you select your dishes, and inform the waiter. As the waiter leaves, you notice the fine print. “Photographs are for illustration purposes only.” So the question might arise in your mind, is the menu a legally binding document?

What if you ordered the dish, and it arrives looking different? You would be upset if the dish arrives looking too different from the photo in the menu. And, if the dish doesn’t arrive at all, you would demand your money back. In that way, the menu is legally binding.

Restaurant menus often describe dishes with photos, and diners quickly form an expectation. Food photography creates expectations, which diners expect the restaurant to meet. Dishes that arrive looking too different, or don’t arrive at all, are grounds for complaint. Failure of consideration, misrepresentation, fraud, cheating.

ICO White Papers as Legally Binding Documents

Many ICO white papers contain a legal disclaimer. “No part of this white paper is intended to be legally binding.” Some of the most successful ICOs which raised huge amounts of funds have this line. The question is, why?

Some ICO projects teams lack technical skill. All they have is a white paper. A document that contains a pipe dream that is pleading to come to life. It might be a good project, giving hope to many a sleepy eyed cynic.

But it may be that the ICO team is trying to limit their risk exposure. They face risks that could lead to the failure of the ICO project. Funds may be insufficient. There may be technical, or legal, challenges. A key team member could drop out. Their best efforts may be insufficient.

Because of those, an ICO team may disclaim the legally binding nature of their white paper.

But what are they doing throughout the ICO?

Here’s what an ICO team does during its ICO…

They make presentations about their project.

They speak on stage to crowds that clap for them.

They make the case for their project through YouTube videos.

They plead for funds so that they can raise enough to meet their soft cap.

And an ICO white paper is a written representation, not a mere verbal representation.

Pundits and reviewers will review it and sing its praises based on its contents.

Potential token buyers will read it time and time again, to figure out if it meets their ideals.

Regulators would read the white paper to see if it infringes security rules.

Bounty hunters will quote from it as if from a holy book, spamming multiple Telegram groups.

In the end, some people who believe in the project will buy the ICO token.

Those guys will want the white paper to be legally binding.

A non-binding white paper is inconsistent with other representations made during the ICO.

But sometimes the white paper must be qualified.

Because the project may be a real moonshot.

The current state of technology may make it impossible to create the project.

That means that the technology has to be created, before the project can come to life.

And maybe, there may be difficulties in obtaining a licence for the project to do what they want to do.

Some pipe dreams rub the authorities the wrong way.

Rather than disclaiming the entire paper, it may be better to qualify parts of the white paper.

It may be better to describe the anticipated difficulties, one by one. (It’s called adequate disclosure.)

That would be much more genuine, and more considerate to the token buyers.

Imagine if the white paper said, “This project may face difficulties in the following: ……”

That might help.

In tort law, we have something called informed consent.

A doctor may be liable for failing to adequately disclose potential risks in a procedure.

To discharge their duty of care, doctors must counsel the patient of potential risks. Risks that arise from the medicine. Risks that arise from the surgery. Blindness. Flatulence. Drowsiness. Loss of physical control. And so on and so forth.

This informed consent must be consistent with everything else the doctor is doing.

The doctor cannot say, “This is a great serum, it can heal you, so sign on this contract and its disclaimer if you want to buy it.”

That’s not consistent behaviour.

And a patient may later raise a complaint against the said doctor for lack of disclosure, or lack of consent.

To ICO project teams: You don’t want those type of complaints.

So you need to have adequate disclosure, and a proper disclaimer.

But is it safe to disclaim legal liability?

Actually, no.

It seems unsafe for ICO project teams to leave out legal disclaimers. After all, there are always inherent risks.

]]>https://lexfuturus.io/2018/11/03/legally-binding-or-not-ico-white-papers/feed/1784The Race for Crypto Licenceshttps://lexfuturus.io/2018/08/27/the-race-for-crypto-licences/
https://lexfuturus.io/2018/08/27/the-race-for-crypto-licences/#commentsMon, 27 Aug 2018 19:51:43 +0000https://lexfuturus.io/?p=735In the crypto world, there is a trend. “We are a regulated crypto exchange.” “We are an approved e-money licence services provider.” “Our securities token offering is regulated by the government of bla bla bla.” This is a trend, a response to the increasing regulation that is creeping up in countries all over the world. […]

]]>In the crypto world, there is a trend. “We are a regulated crypto exchange.” “We are an approved e-money licence services provider.” “Our securities token offering is regulated by the government of bla bla bla.” This is a trend, a response to the increasing regulation that is creeping up in countries all over the world.

Just as crypto projects in unregulated environments will lead to uncertainties, crypto projects in regulated environments lead to certainty. Regulation means licensing, and getting a licence often means complying with the licensing laws. The costs can be quite high, but the rewards can be even higher. In the long term, it means turning a handsome profit. It might even mean longevity, and survival. This is the backdrop to the race for crypto licences.

The consideration of governments

Crypto licences implies licences issued by municipal authorities, and national governments. Everywhere, blockchain evangelists, ICO gurus, crypto advisors, HODLers, and investors, talk about the power and potential of new blockchain platforms. These platforms, they say, will replace the old legacy systems. They will make things transparent. You will be able to audit transactions, and ensure that things transacted on the blockchain, remain on the blockchain. For all posterity.

Everything starts with a first step, however. National governments will need to tokenize their systems. There will need to be interconnectivity between systems. The existing back ends of legacy systems, built on PHP and MySQL, Java and other creaky old code, will eventually have to give way to newer code. All of it sounds great, but national governments will need to pick and choose their partners. After all, some tokens are mere placeholders for the final project, that will need to be developed.

Why is there a race for crypto licenses?

The crypto licence is a means of filtering good blockchain organizations from bad. After all, the space is maturing, and there are new projects popping up. Some of them will become reality, but many will be empty promises. Which organizations to approve? Which to deny? This is the backdrop of the race for crypto licenses.

As the industry matures, various types of blockchain projects can be identified. When you clump disparate projects together, you can categorize them. It should become clear that some of the proposed services, if they originated and operated in the non-blockchain, non-token world, would have to be strictly regulated. These are services like remittance, e-money, lending, fundraising, currency exchanges, issuance of securities, fractional ownership of assets, and such similar things. Just because these projects are recreated and remade using the blockchain, using tokens and smart assets, it does not make them exempt from the laws. Indeed, all existing laws will apply on blockchain projects, such as tax laws, and company laws. Additionally, they will need to be regulated under new laws, with new licensing requirements, to fit the new paradigm of the blockchain era.

Philippines / CEZA Crypto License

In the Philippines, for example, the special economic zone, CEZA (Cagayan Economic Zone Authority), has the right to issue licences for crypto projects. Having spoken to a Philippines lawyer, I understand that this special region of Cagayan had previously given out licences for gaming. Perhaps out of a need for revenue, or innovation, or both, the government has begun to give out licences for cryptocurrency companies. The first project to receive a provisional license in July 2018 was a Hong Kong company, to operate a crypto exchange.

So why get a crypto license? First scenario

You may feel that this race for crypto licenses is rather silly. Why should you get your blockchain company licensed at all? What if you feel that blockchain was championed by anarchists, and governments should not try to regulate the unregulable? To that question, I answer with a question!

Imagine that you go to a restaurant for lunch. It looks fine, and the food on the menu looks good. While reading the menu, however, you read, “This restaurant is not licensed. We do not have a license from the government, even though a license is required to run a restaurant. Accordingly, you understand and agree, that by eating at this establishment, you will bear all risks, including risks of food poisoning, etc.”

If you knew that 99% of the other restaurants in the neighbourhood have a restaurant license, but the one you are in does not, would you eat there? I think you know the answer.

Why get a crypto license? Second scenario

But then there’s an alternate scenario. What if, you read the following words in the menu instead: “This restaurant is not licensed. We do not have a license from the government, but no license is required to run a restaurant. Restaurants in this country are unregulated, but we run and operate our restaurant in the best possible way, to comply with the standards expected of similar restaurants located in First World countries. However, you understand and agree, that despite our best efforts to comply with international standards, by eating at this establishment, you will bear all risks, including risks of food poisoning, etc.”

If you knew that restaurants in a certain place don’t have licenses because, very simply, there is no license to be given out, you would be more likely to accept the non-licensed status of the restaurant. Or you might be afraid of what might happen, if things just fall apart — like when your favourite crypto exchange gets hacked.

Using the same mindset, if the government regulates the crypto industry, getting a license would be desirable. But if the government does not regulate the crypto industry, getting a license might be irrelevant.

Conclusion

Thus, if you run a crypto platform, or a blockchain based solution, it may be worth looking into getting a crypto license. Just because the country in which you are based, does not have a licensing regime, does not mean that you cannot get a license. You could consider setting up a branch office in another jurisdiction — a jurisdiction which issues crypto licences.

In some countries, licenses are issued in limited numbers. Licenses become valuable when there is a limit to the number of licensees that a government will license. Licenses become like land, when things are like that. And as licenses become valuable, because of their scarcity, so too will their value increase — and the value of the company that holds the licenses, will also increase.

]]>https://lexfuturus.io/2018/08/27/the-race-for-crypto-licences/feed/1735Crypto Reg Daily Digest | Thursday, June 21, 2018https://lexfuturus.io/2018/06/21/crypto-reg-daily-digest-thursday-june-21-2018/
https://lexfuturus.io/2018/06/21/crypto-reg-daily-digest-thursday-june-21-2018/#respondThu, 21 Jun 2018 14:45:39 +0000https://lexfuturus.io/?p=709A Japanese village with a population of about 1500 people, is looking to boost the local economy by launching a Municipal ICO. Nishiawakura village of the Japanese Okayama Prefecture, recently made the announcement on the launch of the ICO. It is interesting to see how this will develop, considering Japan currently has no formal regulations covering […]

]]>A Japanese village with a population of about 1500 people, is looking to boost the local economy by launching a Municipal ICO. Nishiawakura village of the Japanese Okayama Prefecture, recently made the announcement on the launch of the ICO. It is interesting to see how this will develop, considering Japan currently has no formal regulations covering ICOs.

Controversial ICO staunch supporter and promoter, John McAfee says he will no longer be promoting nor supporting ICOs from henceforth. Perhaps, the potential 2020 US Presidential Candidate is wary of getting on the bad side of SEC. Interestingly, he has promised to release an article about an alternative to ICOs that even “the SEC cannot touch.”

Following SEC’s classification of ICOs as securities, a New York based blockchain company is gearing up to be the first SEC compliant platform to trade in token securities. The Prometheum platform will allow companies to issue tokens through a regulatory-compliant Reg A+.

Employees of the U.S. executive branch have been advised to disclose their cryptocurrency holdings. The legal advisory was published by the U.S. Office of Government Ethics. One wonders, if this not against the fundamental human right to freedom of possession? Considering cryptos are not yet deemed illegal.

Bank of Korea has decided it will not issue virtual currencies backed by the country’s central bank…yet. It nevertheless acknowledges the challenges as to why this is impossible for now, ranging from unclear regulatory framework to credit risks and liquidity.

Ex-FBI founded law firm just issued an unofficial statement saying Tether has the requisite USD to back its tokens. This is in essence confirming Tether’s claim that each of its 2.8 billion tokens in circulation is backed by one USD.

EOS 21 Block Producers violate Article III of the EOS Constitution, by freezing seven suspicious accounts. According to Article III, the powers of the Block Producers lie in executing the decisions of the Blockchain’s Arbitration bodies.

]]>https://lexfuturus.io/2018/06/21/crypto-reg-daily-digest-thursday-june-21-2018/feed/0709ICO tokens swap – Some ICO tokens are just placeholdershttps://lexfuturus.io/2018/06/18/ico-tokens-swap-placeholders-legal-issues/
https://lexfuturus.io/2018/06/18/ico-tokens-swap-placeholders-legal-issues/#commentsMon, 18 Jun 2018 18:42:34 +0000https://lexfuturus.io/?p=691Some ICO tokens are just placeholders. Probably not for all ICOs, but for some ICOs — the tokens sold in the token sale are merely standing in for another Blockchain token, that is designed to operate on the project described in the ICO white paper. They are merely waiting for the time of the great […]

]]>Some ICO tokens are just placeholders. Probably not for all ICOs, but for some ICOs — the tokens sold in the token sale are merely standing in for another Blockchain token, that is designed to operate on the project described in the ICO white paper. They are merely waiting for the time of the great migration, for the ICO tokens swap.

Placeholders until the ICO tokens swap

Website designers use “lorem ipsum” text to fill up their websites, to show a mock up for their customers. Some ICO tokens are like “lorem ipsum” text, placeholders for the actual tokens. The whole idea of an ICO (initial coin offering, for the uninitiated), is to allow the project owners to sell tokens to raise funds. With the funds, they build the Blockchain platform described in the ICO white paper.

With this model, tokens sold in the token sale (aka ICO, or ITO, or TGE) are merely a means to an end. When the actual blockchain platform has been created, based on a distinct and separate Blockchain, the ICO tokens are then “migrated” to the new blockchain. What this means, in practice, is that there is an ICO tokens swap. The ICO tokens are “swapped” for the actual project’s blockchain tokens.

Two examples of ICO tokens swap come to mind.

The EOS token sold during its ICO was an ERC20 token. It had to be, in order for the project to have a token to sell. With that token, the EOS project could raise funds — funds, to develop its blockchain, and its technology. After a year long ICO of token sales, EOS’s main net was finally about to go live.

But before EOS token holders could use the EOS blockchain, they had to swap their EOS ERC20-based tokens for the EOS-based tokens. As this Medium article from Exodus states, the EOS blockchain is completely separate from the Ethereum blockchain. The EOS ERC20-based tokens from the Ethereum blockchain had to be swapped for those EOS-based tokens from the EOS blockchain.

You see, ICO tokens don’t just “jump” from one blockchain (probably Ethereum) to another (the project’s Main Net). They have to go through a token swap.

A second token swap is that of TRON (TRX), which token swap is happening at this point of time. The TRON main net launched on 31 May 2018, and with it, a need for TRON tokens.

Some Legal Implications of ICO Token Swaps

Naturally, when reading an article on the LF website, you’d expect to read something about the law. And so, here it is — some legal implications of ICO token swaps.

First, what happens if the ICO token swap does not happen?

This could mean that the main net of the project has not been launched, or that the blockchain has not been developed. In other words, it’s possible that an ICO team has received contributions, or ICO funds, but have failed to deliver on their promise to build the platform.

It’s possible that there is a good explanation why the platform cannot be built. It may be a question of lack of funds, or maybe, on the perverse opposite, too much funds. Whatever it is, some ICO project teams fail to deliver on their promise to create the platform, leaving a bad taste in the mouth for ICO token holders.

In such a case, it may be a clear case of misrepresentation, failure of consideration, or even outright fraud. And even though many ICO sales agreements may state that the ICO tokens are sold without any promise that the platform will be built, it is directly opposite to what ICO team members say in person: that they will build the platform which they have promised in the white paper. “It will be the fastest blockchain ever! We will have a gazillion transactions per second!” they cry on stage. And after the ICO, they cry with joy at the amount of ETH (or other cryptocurrency) they raise. And then, the sound of crickets.

Second, what if the ICO tokens are not swapped in time?

This is a valid question. Some ICO projects have set in place deadlines for the token swap to occur. Obviously, if the ICO tokens are not swapped in time, two things might happen: First, the ICO tokens cease to become traded, and second, the blockchain platform will be missing a certain number of tokens.

If the ICO tokens can still be traded, despite the passing of the deadline, they still have economic value. Token holders might not mind, as long as they can be traded on crypto exchange platforms. But if the ICO tokens cannot be traded anymore, they become worthless, unless they can be swapped for tokens that are to be used on the project’s main net.

Obviously, carrying out an ICO tokens swap is quite a hassle, making it unfeasible for ICO projects to allow token holders to swap their tokens indefinitely. Therefore, the deadline to swap. But we live in the real world, where outlandish things can and will happen, including “the dog ate my homework” type of excuses. Take for example the following scenario: A man buys EOS tokens, and just minutes later, is hit by a car. He loses his memory, until half a year later, in October 2018 — long past the deadline to swap EOS tokens.

The strict thing to do is to say, “We’ve made it clear that the tokens must be swapped by so-and-so a date. Since you did not swap, your tokens are now forfeited.”

But the humane thing to do would be to say, “We understand why you could not swap. Since you could not swap, let us now replace your tokens manually.”

It is true that blockchains are immutable, final, and supposedly binding, but token swaps involve tokens, which in and of themselves are not necessarily immutable, not final, and not binding. In fact, that last sentence might also be wrong, because it is the records on the blockchain that are immutable, final and binding. The records on the blockchain cannot be changed.

But if tokens from an ICO need to be swapped, they can be manually swapped, if need be. The project’s owners can manually receive the ICO tokens, and issue a corresponding number of main net tokens to the ICO token holders.

It may be noted that in some ICO projects, a small number of wallets hold a disproportionately large percentage of the project’s tokens. And that means that it would not be impossible for the ICO project owners to conduct a manual ICO tokens swap.

]]>https://lexfuturus.io/2018/06/18/ico-tokens-swap-placeholders-legal-issues/feed/1691Sovereign State Adoption of Cryptocurrency: A Glimpse into Venezuela’s El Petrohttps://lexfuturus.io/2018/06/15/sovereign-state-adoption-of-cryptocurrency-a-glimpse-into-venezuelas-el-petro/
https://lexfuturus.io/2018/06/15/sovereign-state-adoption-of-cryptocurrency-a-glimpse-into-venezuelas-el-petro/#respondFri, 15 Jun 2018 15:50:06 +0000https://lexfuturus.io/?p=430Introduction Venezuela, the South American state made history as the first nation-state in the world, to officially and comprehensively adopt and implement the cryptocurrency technology. Earlier, a certain of nation-states have either contemplated or altogether started their own national cryptocurrencies, but not in the way that Venezuela has its own national fiat cryptocurrency and launched […]

Venezuela, the South American state made history as the first nation-state in the world, to officially and comprehensively adopt and implement the cryptocurrency technology. Earlier, a certain of nation-states have either contemplated or altogether started their own national cryptocurrencies, but not in the way that Venezuela has its own national fiat cryptocurrency and launched an Initial Coin Offering (ICO). Estonia, with the “estcoin“, Russia with “cryptoruble“, Dubai with emCash and a number of others come in handy. Of late, the United Kingdom (UK) intensified its cryptocurrency research effort and central banks across the world are contemplating as well the Central Bank Digital Currencies (CBDCs). The apprehension is the unforeseeable or barely foreseeable impact that the cryptocurrency technology may have on monetary policy and financial stability.

First announcement that Venezuela would mine a national fiat cryptocurrency and do a token launch was made in December, 2017. It is still early days in the development and growth of the financial technology cryptocurrency. Therefore, few nation-states utilise their fiat currencies to finance research and develop the cryptocurrency phenomenon at this time.

Nation-states, and corporates would rather finance research and develop the technology that underpins the cryptocurrencies. This technology is called blockchain; a chain of blocks of transactions secured with cryptographic encryption. As a Distributed Ledger Technology (DLT), this digital ledger blockchain has a number of features and functionalities that primed it for mainstream adoption by governments. It can ensure transparency, accountability, trustlessness, data immutability, real-time time-stamping, create auditable trails of cryptographic proofs, and decentralisation across nodes all over the world.

Cryptocurrency is a more advanced financial tool than the legacy fiat currency. It is the next stage of monetary policy evolution—deflation. As a deflationary currency, cryptocurrency is the direct opposite of fiat currency, an inflationary currency. With cryptocurrencies, a “digital system of transaction” is cryptographically secured. Cryptocurrency transactions are impervious to the traditional vulnerabilities often found with online finance such as “hacking of online accounts and counterfeiting payment authentication”. The public and private key cryptography cybersecurity infrastructure of cryptocurrency can only, and somewhat be vulnerable to quantum computing, the full-scale evolution of which is arguably expected within the next decade.

This article critically analyses the el petro as the first experimentation with cryptocurrency by the sovereign government of a nation-state.

El Petro the fiat cryptocurrency

Venezuela introduced el petro (petromoneda), the national fiat cryptocurrency, nine years after the invention of bitcoin; first decentralised cryptocurrency to reside on the blockchain. El petro as a stablecoin is backed by Venezuelan oil resources, diamond and gold reserves. There are 100,000,000 (one hundred million) units of el petro backed by 100,000,000 (one hundred million) barrels of oil reserves. Each barrel sells for USD67.70 at the international oil market. Therefore, one el petro (1 PTR) sells for USD67.70 at the token sale.

With the el petro offered for sale at an Initial Coin Offering (ICO), Venezuela seeks to raise $5billion, which would go into its sovereign wealth fund. This here explains the international response and success, though arguably in terms of the $5billion which the Venezuelan government claimed was raised:

“The Petro, the digital currency backed by Venezuela’s oil and mineral resources, received more than 186,000 offers of certified purchase from 127 countries, according to Maduro. The buyers included 3,523 entrepreneurs and 83,000 individuals. He added the government had received offers for a total of 82.5 million Petro units.

Last month, Maduro boasted that the virtual currency generated $735 million on the first day of it presale.”.

Like bitcoin, el petro is a decentralised fiat cryptocurrency. But unlike bitcoin, it does not have its own blockchain. El petro is an ERC20 token based on the Ethereum Virtual Machine (EVM), and hosted therein. It has been criticised as undermining other cryptocurrencies and international sanctions.

The presale of el petro opened on the 20th February, 2018. Any individual and corporate from any of the 194 nation-states of the world can make a purchase of el petro at the site, subject to Know Your Customer (KYC) procedure and Anti-Money Laundering (AML) measures.

Complete with buyer’s manual on the el petro token presale site, the prospective individual token buyer‘s email, name, digital copies of identification document, passport, telephone number, and country of residence are required to make a valid purchase. Furthermore, the individual buyer of the el petro is required to indicate whether the el petro token is being bought with another cryptocurrency or a foreign fiat currency, and the maximum amount being bought. At the last part, it is boldly written as an AML measure to ensure that source of fund is legal:

“I declare that the source of fund is lawful”.

For corporates buying the el petro token, digital copies of statutes of constitutive document and tax information registry are required. Further requirements for this corporate category to make a valid purchase are email, name of representative, name of the company, identification type, identification, country of residence, telephone number, the type of buying currency—cryptocurrency or a foreign fiat currency, and the maximum amount to be bought. Also at the last part, the boldly written AML measure is repeated.

Bolívar the fiat currency

Adopted by its legal tender law of 1879, bolívar (bolívar fuertes) is the legacy fiat currency of Venezuela. It was named for the Latin American independence war hero Simon Bolivar.

The new fiat currency replaced the original bolívar. This fiat currency has been in use for financial transactions in Venezuela since January, 2008. Central Bank of Venezuela (Banco Central de Venezuela, BCV) issues and maintains fixed exchange rate for bolívar. A fixed exchange rate, sometimes called “pegged exchange rate” in the basket of currencies, is the currency value fixed against the value of another currency, or against a measure of value in the mode of gold.

Economic sanction and inflation in Venezuela

United States (US) and European Union (EU) imposed financial blockades and sanctions on Venezuelan economy and some of its officials, even in the face of extensive foreign policy academic research that sanctions are rarely effective, and that tested and recommended strategy is the carrot and stick approach. On the announcement that Venezuela would mine own national cryptocurrency and do a token lunch (otherwise known as “Initial Coin Offering”), there was no instant foreign policy reaction from the United States. After the el petro token sale went live, the United States banned its citizens from its purchase.

Going by the majority of sentiments expressed, possibility of circumvention of the financial sanctions with the cryptocurrency el petro gave rise to the ban by the United States. There is an apprehension on the part of the United States that Venezuela could use the fiat cryptocurrency to circumvent sanctions and escape the harshness of its economic situation.

Venezuela cannot raise bonds and securities in the regular financial market, having defaulted, and thus failed to meet both short-term and long-term financial obligations. But with the el petro, Venezuela hopes to complement its sources of foreign exchange earnings, recover the economy, and ultimately access the international cryptocurrency market.

Venezuelan economy suffers quadruple digits inflation, as the bolívar price plunges into an all-time low, because of the unchecked money supply expansion and ensuing financial sanctions by the United States and the European Union (EU). Resource mismanagement, deeply fragmented socialist system, falling oil prices and monocultural economic fixation have been other causes of the collapsing socio-economic order in the Bolivarian country. Sky-rocketing commodity prices have occasioned mass exodus of hundreds of thousands of Venezuelan citizens, to save themselves from the critical human condition.

Deflationary currency standard

With bitcoin enters the era of deflationary currencies, where there exists, a predetermined number of cryptocurrency programmed to be mined within a particular period of time. These cryptocurrency units do not need the government to underwrite them—but that is a potentially critical situation that speaks to the general, global regulatory uncertainties. As earlier noted, cryptocurrencies thrive on cryptography and mathematics. According to Russ Roberts:

“Elaborate controls to make sure that currency is not produced in greater numbers is not something any other currency, like the dollar or the euro, has…That is considered very destructive in today’s economies, mostly because when it occurs, it is unexpected…In a Bitcoin world, everyone would anticipate that, and they know what they got paid would buy more then than it would now.”.

“A fixed money supply, or a supply altered only in accord with objective and calculable criteria, is a necessary condition to a meaningful just price of money”.

Bitcoin thrives on a fixed money supply algorithm. The number of bitcoins that would be mined is 21,000,000 (twenty one million). The last bitcoin would be mined on the 7th May, 2140. Other cryptocurrencies equally have a predetermined number to be mined—cryptocurrencies and tokens follow this deflationary protocol in general. Bitcoin is an instructive example that cryptocurrencies are not mined indiscriminately as would fiat currencies. Fiat currencies are manipulated for quantitative easing purposes to “lower interest rates and increase the money supply”, all in an effort to effectively manage and control inflation. In Quantitative Easing (QE), the central bank creates money, and uses it to buy up financial assets in the securities market. This increases the money supply, and stimulates the weak economy.

El petro is a cryptocurrency, and therefore designed to be deflationary. After the mining period, and scarcity hits hard, el petro skyrockets in value. This value appreciation is likened to the gold value after its mining diminished. Another additional advantage of el petro is that as a fiat cryptocurrency, it is a stablecoin—asset-backed.

Bolívar as an inflationary currency

The bolívar as a fiat currency, and like all fiat currencies, is an inflationary currency. With the quadruple digits inflation, worst hit in its history, it got so bad that the Venezuelan government plans to eliminate the physical currency bolívar, in order to alleviate cash shortages, which has crippled the Latin American country’s economy. The bolívar currency denominations have become high currency denominations with almost zero purchasing power and exchange value. Bolívar loses 9.99% of its value in two years.

Trillions of worthless bolívars in banknotes have been printed to escape runaway inflation rate, while the money supply doubled between March 2016 and March 2017. Yet the situation would exacerbate rather than ameliorate. The more bolívares are printed, the more the cost of living, goods and services skyrocket. This, in essence, causes fiat currency price instability and affects the economy as a whole. Low-value banknotes have been rendered outdated in the Venezuelan economy, because of the hyperinflation.

According to economic data released by the Venezuelan National Assembly, and supported by figures from independent economists, the annual inflation rates in commodity prices have risen 4,068%, and the bolívar down 40% in a single month against the dollar.

Conclusion

With Venezuela leading the way for nation-states in the comprehensive adoption of the cryptocurrency technology, the coast becomes increasingly clear that in no time, the unsustainable inflationary currency system upon which the global economic infrastructure is built may hold no longer.

]]>https://lexfuturus.io/2018/06/15/sovereign-state-adoption-of-cryptocurrency-a-glimpse-into-venezuelas-el-petro/feed/0430Legal Liability of a Hacked Coin Exchangehttps://lexfuturus.io/2018/03/09/hacked-coin-exchange-legal-liability/
https://lexfuturus.io/2018/03/09/hacked-coin-exchange-legal-liability/#respondFri, 09 Mar 2018 18:34:02 +0000https://lexfuturus.io/?p=415Hacked Coin Exchange: Mt Gox James (not his real name) is a Bitcoin investor. Back in 2014, James used Mt Gox, the world’s biggest coin exchange. He stored all his Bitcoins there. Until one day, when James woke up to find that Mt Gox had been hacked, and all of its Bitcoins were gone. Mt […]

Back in 2014, James used Mt Gox, the world’s biggest coin exchange. He stored all his Bitcoins there.

Until one day, when James woke up to find that Mt Gox had been hacked, and all of its Bitcoins were gone.

Mt Gox was a name that was known to many crypto investors. If you were a Bitcoin buyer, you would have heard of them.

Even Roger Ver, dubbed by many as the Bitcoin Jesus, had at one point said in a widely viewed YouTube video, Mt Gox is OK.

It Was July 2013.

“I’m Roger Ver, longtime Bitcoin advocate and investor,” said Roger, looking slightly off camera. “Today I’m in the Mt Gox world headquarters in Tokyo, Japan. I had a nice chat with Mt Gox CEO, Mark Karpeles, about their current situation. He showed me multiple bank statements, as well as letters from banks and lawyers. I’m sure that all the current withdrawal problems at Mt Gox are being caused by the traditional banking system. Not because of a lack of liquidity at Mt Gox.

“The traditional banking partners that Mt Gox needs to work with are not able to keep up with the demands of the growing Bitcoin economy. The dozens of people that make up the Mt Gox team are hard at work, establishing additional banking partners that will eventually make dealing with Mt Gox easier for all their customers around the world. For now, I hope that everyone will continue working on Bitcoin projects that will make the world a better place.”

Roger Ver had apparently been placating the nervous Bitcoin investors that their difficulties in withdrawing money was only momentary.

Coincheck’s operators felt responsible to pay back all their customers who had lost their NEM coins.

Not surprisingly, the announcement has led to an increase in the price of XEMs (the tokens of the NEM blockchain).

Hacked Coin Exchange: Legal Obligations

So what are the legal obligations of the coin exchange operators? Are they liable in any way for the tokens that have been stolen?

One of the basic problems that we face is the refusal of many state governments to recognise bitcoin, and other virtual currencies, as legal tender. The fact the bitcoin currency is not a legal lender doesn’t mean it’s illegal.

It’s just like, alcohol is haram in Islam, so it’s all right to destroy alcohol in classical Islam. Why destroy it?

The first question is often, are bitcoins worth anything?

If bitcoins are not worth anything, then, can a hacked coin exchange be held liable to compensate its customers?

But that question is highly misleading.

Because coin exchanges make money out of the trading of bitcoins, and other virtual coins (often called “altcoins”), they have already recognised the intrinsic value of those bitcoins.

Because they can put a dollar value to the bitcoins, it will not be fair to say, “bitcoins are not legal tender, so I don’t have to pay.”

The Real Question for Hacked Coin Exchanges

The real question should be, did the coin exchange promise to safeguard the bitcoins of its users?

Did the crypto exchange make any representation that the bitcoins would be safe on the web wallet? This is yet another good reason to hold your private keys.

When its customers and users used the coin exchange, for trading and deposit of virtual currency, did it display any disclaimer and warning to its users?

Most coin exchanges would accept a deposit of bitcoins because it means money to them.

They would not display on their front page, “Warning — you might lose all your Bitcoins by using this website”.

They dare not, because it means business for them.

And as business operators, they have an obligation to ensure that their code is safe and secure.

That means using HTTPS where possible. Using secure protocols where possible.

There is probably such a thing as negligence and failure to discharge duty, for coin exchange operators.

If they knew that something could be done, but they failed to do it — it’s negligence.

If they knew that something was important, and it was within reach — it’s a duty for them to carry it out.

Disclaimer

This article has been prepared for general information and the reading pleasure of the general public. While there are some nuggets of wisdom that are being shared, your case might be different. We invite you to contact a lawyer from our team for a consultation.

]]>https://lexfuturus.io/2018/03/09/hacked-coin-exchange-legal-liability/feed/0415Legal Liability in Scam ICOs – Who is liable?https://lexfuturus.io/2018/02/21/legal-liability-scam-icos-who-is-liable/
https://lexfuturus.io/2018/02/21/legal-liability-scam-icos-who-is-liable/#commentsWed, 21 Feb 2018 18:47:16 +0000https://lexfuturus.io/?p=384Introduction – Scam ICOs Nobody could guess that it was another case of scam ICOs. Prodeum would, in not so many words, put fruits and vegetables on the blockchain. The premise was that, PLU’s (price look-ups) were outdated. Prodeum would use Ethereum and IPFS to revolutionize PLU coding. The funds came in. The exact amount raised […]

Legal liability of advisors and partners in scam ICOs

Nearly every ICO today has a board of advisors. Their role could range from heavy involvement right up to window dressing.

So what happens when the ICO advisor finds that he has been suckered into a scam ICO?

If the ICO advisor was hired for a certain scope that does not involve marketing, promoting, or making representations about the ICO, but only for technical advice, it’s possible that the ICO advisor is not bound by any legal liability.

That’s because people won’t say, “Your statement caused me to invest in this scam ICO.”

But imagine when an ICO advisor says, “This ICO is rock-solid and I back it 100%.”

And then a few days later the ICO team does an exit scam. (Poof!)

That ICO advisor should co-operate with the authorities as much as possible.

He could have helped spread fraudulent misrepresentations.

And spreading fraudulent misrepresentations, even if you did not know that they were fraudulent, could be criminal.

TokenLot is in no way affiliated with any initial coin offering (“ICO”) that we offer in either or pre-sale or post-sale offerings and is merely a conduit that gives users the ability to participate in the respective ICO’s.

As an intermediary, TokenLot bears no responsibility for any loss of funds resulting from issues that arise with the entity behind any ICO that TokenLot offers for sale. This includes, but is not limited to: technical/ protocol issues, legal issues, loss of funds due to fraud or theft, distribution issues, distribution delays, insolvency of the entity offering the ICO, or regulatory issues stemming from the ICO.

As you can see, they had disclaimed liability for any losses sustained by ICO investors.

But they still elected to work with the FBI to identify the perpetrators. Smart move.

Legal liability of paid shills in scam ICOs

Paid shills are people who are paid to give credibility to the ICO team, without disclosing that fact to potential ICO investors.

Let’s be clear here. Shills are common in other situations, not just scam ICOs.

For example, an auctioneer may hire a paid shill to bid on an auction item, to drive up its price.

The famous Milgram experiment from social psychology shows that when you have a crowd of people doing something, an observer will follow the crowd behaviour. Even if they don’t really agree with the crowd.

Shills create FOMO (fear of missing out). When was the last time you heard, “One hundred raving fans can’t be wrong?!”

But a hundred raving fans could be paid shills. Paid to say things and attract new token buyers.

A paid shill would have some contract or agreement with the ICO project operators.

But contractual obligation does not vitiate the obligation to use good sense, and alert the authorities of frauds.

So if the paid shill gets a whiff of a scam, he’s obliged to alert the authorities.

Want blog posts? Tweets? Anything else? You can put up a bounty for that, too.

The bounty hunter, who participates in ICO bounty programs, probably have similar liability to advisors, but at a much diminished scale.

If the bounty did not involve making any representations or promotion, the ICO bounty hunter will probably not incur liability.

But if it involved posting messages on social media — “This is the best ICO ever, you’ll make 500% of your investment” — it’s arguable that there was some involvement in spreading fraudulent misrepresentations.

But so far, nobody has been charged for being an ICO bounty hunter.

Limit your liability – Do your own KYC / AML

So if you are a team member, advisor, partner, paid shill, affiliate, or even bounty hunter — how can you limit your liability in scam ICOs?

KYC / AML is a good filter for ICOs to filter out criminals, fake identities, etc.

If you are in one of the categories of people I identified above (team member, advisor, partner, paid shill, affiliate, bounty hunter) you might want to consider doing some KYC / AML on the ICO project itself.

After all, the ICO project would be your client. (You are providing a service to the ICO project.)

And before you take on your client, you want to be sure that your client is genuine.

So check to see if the team members are real. Talk to them, contact them on LinkedIn, follow up on their CV.

Check the company organizing the ICO. See whether it exists, and check its track record. Check its statements on the ICO.

Check with other advisors who can tell whether or not a project is genuine.

And when you find a scam ICO, it’s checkmate.

Time to get out of there.

Disclaimer

This article has been prepared to provide general information. Your case might be different, and you should seek legal advice from a qualified lawyer.

]]>https://lexfuturus.io/2018/02/21/legal-liability-scam-icos-who-is-liable/feed/2384Do ICOs Cause Crypto-Inflation?https://lexfuturus.io/2018/02/10/do-icos-cause-crypto-inflation/
https://lexfuturus.io/2018/02/10/do-icos-cause-crypto-inflation/#commentsSat, 10 Feb 2018 18:03:45 +0000https://lexfuturus.io/?p=354Introduction to Crypto-Inflation Today’s post is a response to a conversation about ICO’s and what would happen if, in the real world, a government prints money. I call it crypto-inflation. Before we begin, here is my disclaimer: I am not an expert on economics. My training and education have been on law. I studied managerial […]

Introduction to Crypto-Inflation

Today’s post is a response to a conversation about ICO’s and what would happen if, in the real world, a government prints money. I call it crypto-inflation.

Before we begin, here is my disclaimer: I am not an expert on economics. My training and education have been on law. I studied managerial economics at masters level, but economics is not my forte. You’d best check with an economist.

Inflation

A relic of Zimbabwe’s hyper-inflation days. Do ICOs cause crypto-inflation?

Penn State University defines inflation as the rising price of a basket of goods and services, not reflected by increased productivity.

Inflation means goods and services go up in price, but real output does not. It means that output is stagnant, but prices keep going up.

You may be wondering how this works to crypto-inflation — we’ll get there soon.

Printing Money vs Inflation

Of the factors that cause inflation, the one relevant to this post is printing of money.

You see, when a government prints money without any increase in output, that extra money enters the economy. It might be a convenient option for the government to settle its debts, or give salary to its employees.

But when many people have extra cash, they buy things at higher than average prices. There’s now extra cash chasing the same things. The willingness to pay more causes prices to go up.

ICOs vs Inflation

We think of an ICO as this: A fundraising exercise, in which a token or coin is sold to members of the public (contributors), in exchange for an established cryptocurrency. (This definition might be worth quoting.)

So, after a successful ICO:

The ICO project owners will have a lot of cryptocurrency from the contributors.

The ICO contributors have bought a lot of ICO tokens from the ICO project owners.

The ICO project owners will still have ICO tokens in their vault (typically) for their team, etc.

Let’s have an example of ICO project run by James. James sells 60% of ICO tokens for $1 million. In this example, he sells all of them to Jane, at a 50% bonus. (Lucky lady.) So Jane receives $1.5 million worth of ICO tokens, but pays only $1 million in cryptocurrency, like ETH. James keeps the balance 40% of ICO tokens.

At this point of time, only the ETH is worth something. The ICO tokens, meanwhile, are worthless until they are floated on a crypto-exchange.

James manages to float the ICO tokens on a crypto-exchange. Suddenly Jane can trade her $1.5 million worth of ICO tokens for Bitcoin or Ethers.

Jane can trade her ICO tokens and get $1.5 million worth of ETH.

James, still retaining 40% of ICO tokens, can also swap them for $1 million worth of any cryptocurrency of his choosing.

And that’s not forgetting that James got $1 million in cryptocurrencies from Jane, as payment for the tokens.

So, before flotation on a crypto-exchange, there is only $1 million worth of cryptocurrency.

But after flotation on a crypto-exchange, there is now $3.5 million worth of cryptocurrency.

ICO tokens on a crypto-exchange can be converted into prominent cryptocurrencies. And prominent cryptocurrencies like Bitcoin or Ethers can be converted into fiat currency.

So the question is then, does this increase in the circulating crypto-money lead to crypto-inflation?

Crypto-Inflation vs Increase in Real Value

If you recall the discussion above, inflation happens when there’s more money than output. Too much money without increased output leads to inflation.

But the world of Blockchain projects is a world full of exciting prospects and possibilities.

Just today I was telling my friend about PowerLedger, the Blockchain project that enables peer-to-peer trading of energy. That project raised AUD $34 million. My friend, who is himself in the energy industry, was suitably impressed. I advised him to look into the PowerLedger project and consider using their solution.

There are countless Blockchain projects that are now being launched that impact societies, businesses, and governments everywhere.